Affordability of Housing in the Strata Industry in ACT - White Paper 2021 - vantagestrata.com.au
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Affordability of Housing
in the Strata Industry in ACT
White Paper 2021
Affordability of Housing
in the Strata Industry in ACT
Executive Summary
As the cost of property ownership becomes increasingly
prohibitively expensive for first home buyers and lower income
households, the strata sector will become a more important
asset class than ever.
Recent stamp duty reforms in the ACT have led to negative press
attention around increasing property rates, taxes and strata fees.
It is critical that affordability of owning strata and unit titled
property is protected, and that strata is appealing for current
and potential homeowners and investors.
The strata community is home to millions of Australians, and is on
course to increase over the coming years. It is climacteric that
the sector is supported in its growth, with both legislative and
practical backing and assistance.
Any policy that limits the ability for an owners corporation to
generate additional revenue, or to reduce its operating cost, is a
missed opportunity to offset the increasing cost of property taxes
being introduced by the ACT Government.
vantagestrata.com.au 2
Affordability of Housing
in the Strata Industry in ACT
This report identifies seven solutions that would increase affordability
of strata and unit title ownership, ease pressure on owners’ levies, and
make it more attractive and affordable for homebuyers and investors:
Allowing owners
corporations to earn
income from Reforming the
passive assets, way unit rates Owners
dealing in (leasing) are priced to corporations
property and Introducing avoid unfairly treating their long
conducting separate affecting strata term assets
business for profit water meters owners differently
01 02 03 04 05 06 07
Embracing the gig Splitting shared Having income
economy – costs more earned by owners
particularly regarding fairly corporations treated
short-term letting differently by the
and parking ATO for taxation
purposes
It is essential that action is taken by the strata community and the ACT and
Commonwealth governments to support the healthy growth of the vital
strata sector.
Housing affordability is a major challenge facing the ACT. Although this
report addresses barriers and opportunities specific to strata and unit
titled property ownership, it is undoubtedly true that housing affordability
generally is significantly impacted by this important property class.
vantagestrata.com.au 3
Affordability of Housing
in the Strata Industry in ACT
Introduction
The strata industry in Australia makes up a significant and growing sector of the
housing market, with millions of people living in strata units across a variety of urban,
regional and even rural locations. The majority of the Australian population lives in
cities, so strata represents an essential element of the housing stock for the country.
Broadly, the cost of property in Australia is increasingly considered prohibitive for
first time buyers and middle-income Australians, making strata and unit title the
only viable point of entry into the property market. Recent property tax and rates
reforms have increased the cost burden of strata and unit title property ownership
in particular.
The confluence of the inherent costs of owning a strata and unit title property -
property rates, taxes and strata fees - is making strata ownership less attractive.
Solutions to these costly factors deterring strata ownership need to be created and
executed because the strata industry is only set to grow further, and it is crucial to
providing housing for people across the ACT and Australia.
It is essential that the sector is supported in its growth and price accessibility, with
both legislative and practical measures.
In an effort to combat the potentially negative sentiment, Vantage Strata has
identified several methods, both practical and legislative, by which the ACT strata
sector could make strata ownership more profitable, accessible and affordable for
homeowners, encouraging investment into the sector.
This white paper is intended to provide a basis for progressing this vital issue,
with both the strata community and government encouraged to take action.
vantagestrata.com.au 4
Affordability of Housing
in the Strata Industry in ACT
Background
The strata industry
Strata is an important and buoyant element of the Australian housing
market. Figures from the 2020 UNSW City Futures Australasian Strata
Insights Report show that over 2.2 million people, or 9 per cent of
Australian households, live in apartments, the majority of which are
strata units. Over half of those residing in apartments are under 40,
with many of them single.
With potentially half of the country’s population forecast to be living in
an apartment by the 2030 decade, this market is substantial and only
set to rise.
Owners corporations (also known as body corporates) consist of all
unit owners. These owners corporations collect money through unit
title owners’ fees to fund critical services like sanitation, insurance, fire
safety, waste management and refuse.
Strata fees, or levies, are paid by unit owners, not renters, and they fall
into three categories:
Administrative fund levies, for everyday expenses like utility bills,
insurance, cleaning and gardening costs.
Sinking fund levies, for bigger expenses such as repairing
roofs or common area renovations.
Special levies, for anything else required to
maintain common property.
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Affordability of Housing
in the Strata Industry in ACT
ACT government tax reforms
In 2012, the ACT government embarked on a major programme of conveyance duty
(known as stamp duty) reforms, with the intention of phasing it out completely after 20
years. Since 2012, the territory government has been gradually replacing this tax with
higher land taxes and rates for both residential and commercial property owners.
The ACT government acted due to their belief that stamp duty was unfair and unfit for
purpose as it is:
Only paid by the small number of people actually
buying properties rather than by all home and land owners;
A major financial barrier for first-time homebuyers; and
An unreliable source of income.
Unlike other states and territories, rates in the ACT directly fund vital community
services like health, education, housing, roads, public transport, police and emergency
services. The government’s new system is intended to provide a consistent, stable and
sustainable revenue stream to enable long-term investment in key services like health,
education and transport.
Outcomes of the reforms thus1 far2
Stamp duty was abolished on 1 July 2018 for commercial
properties of $1.5 million or less.
Since 1 July 2019, first-home buyers no longer have to pay stamp duty as long
as their annual household income is less than $160,000 (called the Home Buyer
Concession Scheme). The first-home owners’ grant of $7000 has been scrapped.
vantagestrata.com.au 6
Affordability of Housing
in the Strata Industry in ACT
Rates increased sharply for the first years of the new system, but from 2021-22,
average rates are set to increase by 3.75% for the next five years.
Two independent reports on ACT tax reforms have identified that the
changes slightly increased economic activity and property prices, led to wealthier
Canberrans paying more of the tax and helped more lower-income people
to buy homes, especially female first-home buyers.
A significant number of strata and unit title properties have been pushed
into the highest bracket for calculating rates due to a change in how the land
value is applied to units, lots within a strata, and units plan.
Increasing the affordability and appeal of strata ownership
This paper identifies seven straightforward methods of increasing the
profitability of strata and unit title ownership, easing pressure on owners’ levies
and making it more attractive and affordable for homebuyers and investors:
Allowing owners
corporations to earn
income from Reforming the
passive assets, way unit rates Owners
dealing in (leasing) are priced to corporations
property and Introducing avoid unfairly treating their long
conducting separate affecting strata term assets
business for profit water meters owners differently
01 02 03 04 05 06 07
Embracing the gig Splitting shared Having income
economy – costs more earned by owners
particularly regarding fairly corporations treated
short-term letting differently by the
and parking ATO for taxation
purposes
vantagestrata.com.au 7Affordability of Housing
in the Strata Industry in ACT
01 Allowing owners corporations to earn
money from conducting business
The issue
The ACT strata laws state that: ‘An owners’ corporation must not carry on business except in the
exercise of its functions’.
They also state that the owners corporation may not transfer, sublet or mortgage, at law or in
equity, its interest in the common property. In practise this prevents owners’ corporations in the
ACT from leasing or receiving any income from the common property.
In other states and territories around Australia owners’ corporations can and successfully do
receive income from use of the common property for various activities such as renting space
and paying for advertising. There appears to be no logical rationale for this to be prohibited in
the ACT.
Potential solutions
It seems prudent to capitalise on market forces and enable owners to benefit from the
assets they own. Legislative amendments that allow owners’ corporations to capitalise
on opportunities for generating passive income will effectively bring down levies.
Owners’ corporations could earn money from common property to add to their
administrative funds in a number of ways. Some of the income generating initiatives
successfully employed in strata buildings outside the ACT include:
Renting common space out for functions such as weddings and corporate events
Public car parking
Allowing telecommunications companies to erect communication towers on the roof
Sharing in the revenue generated by “Embedded Networks”
for the delivery of utility services to residents.
vantagestrata.com.au 8Affordability of Housing
in the Strata Industry in ACT
As an illustrative example, there have been examples in the ACT whereby a telecom
provider has sought to rent the common property on the roof of a strata building to
house a telephone tower, in return for paying the owners corporation an annual rent
of $20,000 or more. In these instances the current strata laws prohibit an
arrangement such as this being agreed.
Another example relates to “Embedded Networks” within owners corporations,
whereby the corporation owns all of the utility infrastructure (i.e. meters and wires)
from the connection point at the street throughout the building, which essentially
creates a private network. There are numerous utility retailers who would like to have
exclusive access to use these private networks to provide services to the residents of
these buildings. Many of those retailers will share in the profit of selling utilities to the
end user with the owners corporation for such access. The potential returns are
significant and can exist in perpetuity.
Arrangements that enable passive income opportunities are obviously of benefit to
the owners’ corporation, subsidising the payments of fees and levies and boosting
both the profitability and appeal (read; value) of strata.
Steps required
The ACT strata legislation should be reformed to allow owners’ corporations to
carry out business, in line with other states and territories. The prohibition on
owners corporations leasing its interest in common property must also be
removed.
vantagestrata.com.au 9Affordability of Housing
in the Strata Industry in ACT
02 Embracing the gig economy
particularly for short-term letting
The issue
While it is commonly accepted that short-term letting companies are here to stay, ACT
legislation has failed to directly address the question with any form of legislation or policy
response. Despite the ACT Government leading the nation in terms of policy for the
regulation of ride sharing (Uber etc), they have been conspicuously quiet regarding short
stay letting driven by Airbnb and it’s contemporaries. It has been speculated by property
insiders that the ACT’s unique Crown Lease System is the cause of this paralysis, given that
the definition of this type of use will be very difficult to define without opening a can of
worms for already established definitions of “residential” and “commercial
accommodation”.
Consider first the sensible advancements in NSW. Changes to the Fair Trading Act 1987 and
the Strata Schemes Management Act 2015 came into force on 10 April 2020 that mean that
strata properties in New South Wales can put bylaws in place to ban short-term letting
where it is not an owner’s principle place of residence. However, they will still be able to rent
out their home or rooms within their home while they’re living there, or while they are
temporarily away from home on holiday or for work.
This is intended to allow strata owners to continue to gain from the benefits of short-term
lettings companies such as Airbnb and Stayz, yet minimise negative impacts on
neighbours. Areas of concern have tended to be issues such as peace and quiet, use of
facilities such as swimming pools and gyms, car parking, security issues, and wear and
tear of common areas.
There has been a considerable amount of negative press attention around this issue, and it
clearly makes strata a less attractive proposition, particularly for the investment market.
vantagestrata.com.au 10Affordability of Housing
in the Strata Industry in ACT
Potential solutions
Instead of fighting (legally and otherwise) against short-term accommodation, the
strata industry could enter discussions with short-term letting companies to find ways
to make the situation work for all parties.
Owners’ corporations could financially participate in short-term lettings in their
buildings, generating income by administering some of the processes. This gives a
clear incentive and provides an additional revenue stream for owners’ corporations.
Owners’ corporations could participate in a number of ways, such as managing the
distribution of keys, the interaction with the guest, reception and cleaning.
This could lead to owners’ corporations giving letting companies a positive
endorsement as opposed to working against each other.
Minimising negative impacts on neighbours could be achieved by the development of
a mandatory code of conduct and robust complaints procedure.
The ACT was one of the first jurisdictions in the world to accept, regulate and tax the
activity of ride sharing. This same approach should be applied to the idea of short
term letting. There are currently additional revenue opportunities that are not being
taken advantage of, both from an implementation and a taxation point of view.
Steps required
The surge in the short-term lettings industry cannot be ignored. The strata
industry should work together with companies such as Airbnb to identify ways to
make the process mutually agreeable. Owners’ corporations should explore
generating extra income streams by embracing the gig economy and unlocking
opportunities within the strata infrastructure asset.
vantagestrata.com.au 11Affordability of Housing
in the Strata Industry in ACT
03 Introducing separate
water meters
The issue
In the ACT there is a legacy of strata apartments that do not have separate water meters as it has not
previously been required that developers install individual meters for each unit. In practice, this
means that everyone pays for the accumulated cost of the apartment complex water use, and this
cost falls to the owner as part of their strata levies. It is not possible to extract individual usage from
the building’s bill, so rental tenants do not have to pay for their water usage.
The owners’ corporation receives a bill, generally quarterly, for all water used in the building, including
for all common areas as well as all units. Each owner pays an equal share through their levies.
This is unfair and inequitable for two reasons:
1. Owners are not invoiced on actual consumption, so fees may be higher than they should be; and;
2. The cost is actually a legitimate tenant cost, but renters are not having to pay and this is clearly a
disincentive for the investment market.
Individuals are far less likely to be conservative with water when they are not paying for what they
actually consume, which has a two-fold effect:
1. Bills are likely to be higher; and
2. There is an obvious environmental impact, when water conservation is an issue across Australia.
Potential solutions
Separate water meters can be installed, which requires firstly that every owner agrees
to this in writing. There are currently two main options:
Individual meters can be retrofitted. The necessary work involved is generally expensive
and sometimes may not even be feasible due to the location of the plumbing facilities.
vantagestrata.com.au 12Affordability of Housing
in the Strata Industry in ACT
Deduction meters/Independent smart meters could be installed at each unit that run
off the building’s main meter. The owners’ corporation would be responsible for the bill,
and then would need to work out and separately bill each unit. Owners corporations
can be reluctant to do this due to the administration involved and the potential for
disputes and liability. It would however mean that tenants could be billed for their
individual usage.
Although all of the current options come with some complexities, it is a situation that will
need to be rectified to make it so that each unit is billed fairly, and those who consume
the water pay for its consumption. It would also support the increasingly urgent matter
of environmental considerations.
Steps required
Strata corporations should explore ways to measure individual water
consumption through either retrofitting individual water meters or introducing
deduction meters that run off the main meter. Government subsidies for the
cost of retrofitting,
vantagestrata.com.au 4Affordability of Housing
in the Strata Industry in ACT
04 Splitting shared costs with a more
equitable payment structure
The issue
Until November 2020, when the unit title laws were amended in the ACT, mixed-use strata
units in the ACT were restricted in relation to how costs were distributed between owners.
Essentially the only viable option was to apportion costs according to each units Unit
Entitlement, which is an arbitrary number calculated according to the proportional value of
each unit. Under this arrangement, unit entitlement did not necessarily equate to fair. For
example commercial units are likely to make greater demands on shared services such as
grease traps, maintenance and public toilets, but their percentage of the costs were not
greater than a user whose demands on shared services were far less. Until the amendment
to the law on 1 November 2020, it was not possible to exclude any residents from these
costs, despite the imbalance in shared service usage.
Since the change in law in November 2020, it is now possible to exclude a unit, or group of
units, from certain costs based on a user pays model. However, most buildings have not yet
acted on this to split the budgets across the user groups and create a more equitable
payment structure.
Today, despite the reforms, costs such as maintenance and repairs to bathroom facilities
solely used by a restaurant, for example, are still generally shared between unit owners
based on Unit Entitlement, whether they are residential or commercial.
Potential solutions
The ACT government has introduced its Managing Building Better reforms for the
growing mixed-use developments sector. The first stage of these reforms commenced
on 1 November 2020 with the introduction of the Unit Titles Legislation Amendment Act
2020. The reforms apply to all buildings governed by the Unit Titles Act 2001 and Unit
Titles (Management) Act 2011.
vantagestrata.com.auAffordability of Housing
in the Strata Industry in ACT
One of the reforms allows for a more equitable distribution of building costs, such as
water, maintenance and insurance.
Buildings with mixed-use tenancies, such as ground-floor businesses with residential units
above, are now able to split costs for commercial tenants from those of residential
tenants. The reforms will also enable the costs of common facilities like electric car
charging stations, air conditioners or utilities to now be paid by the user – to ensure that
some owners are not being subsidised by others.
However, most strata corporations have not yet acted on this change to split costs
across the user groups and create a more equitable payment structure. Costs must be
fairly allocated to make fees more equitable, encourage investment and make strata
more attractive to homebuyers and investors.
Steps required
All strata corporations must be encouraged to act immediately to review their
costs according to usage, to ensure some owners are not subsidising others and
costs are fairly allocated.
vantagestrata.com.au 4Affordability of Housing
in the Strata Industry in ACT
05 Reforming the way unit rates are priced
to avoid unfairly affecting strata
The issue
In 2017, the ACT government amended the way they calculated rates. Until then, rates were
calculated after the land's unimproved value was divided by the number of apartments on the
site. Under this system, most apartments fell into the lowest tax bracket.
Since the change to ratings formulas for units in 2017, most units have been driven into the top
bracket as rates are now worked out by dividing the entire land value by the number of units.
The marginal rate applied to a block of land is not adjusted for a block of land with a complex of
units to account for the many properties. This specifically prejudices strata owners; everyone in
the building is paying tax at the highest rate.
This significant rate increase could force thousands of apartment owners in ACT into financial
distress, resulting in potential defaulting of levies for essential costs such as maintenance and
insurance.
Because of the interconnected nature of strata, if there are a number of defaults, this could
have a significant negative impact on all owners and the entire strata corporation.
Not only will this adversely affect current owners, it could also significantly hamper the growth
of Canberra’s vital strata market deterring prospective strata property buyers who are wary of
the extra rates.
Potential solutions
It is recommended that the ACT government reviews the ratings system as a matter of
urgency. The strata community has united with calls to the ACT government to act
immediately to overhaul the system and ensure ratings for strata units are fairer. Leading
industry figures have offered to work closely with the government to address the issues.
vantagestrata.com.auAffordability of Housing
in the Strata Industry in ACT
Steps required
Immediate government action is needed to ensure the ratings system is rehauled
to make it fairer for strata unit owners. The strata community is eager to work
closely with the government on an advisory basis.
06 Having income
earned by Owners
Corporations treated differently
by the ATO for taxation purposes
The issue
All income earned by owners corporations (or their state relevant counterparts) is treated the
same as company tax, and taxed at the current company tax rate. Considering that an owners
corporation operates much more akin to a Not for Profit or a Super Fund, the taxable rate for
income earned should be much lower than the tax rate for business / companies.
Potential solutions
All strata corporations are granted
special treatment for earnings
by the ATO.
Steps required
Support and advocacy by state and territory governments and the
Strata Community to push the commonwealth government to review
the tax status of strata corporations.Affordability of Housing
in the Strata Industry in ACT
07 Owners corporations treating their long
term assets differently
The issue
Owners corporations across Australia have accumulated substantial cash assets within their
“Sinking Funds” There is no doubt that across the industry of Strata Managers in Australia, the
cumulative value of these “Sinking Funds” is incredibly substantial. In fact, it could be argued that
the accumulation of Sinking Funds, which are collected to fund capital costs for owners
corporations that may be 10 - 20 years in the future, is creating a cash reservoir that has similar
properties to Superannuation Funds. The difference is that Superannuation is underpinned by the
principle that not only is it important to put money away regularly over a long period of time, but
also that the accumulated funds that are put away make a return in the meantime.
Perplexingly, accumulated Sinking Funds are more often than not held in cash accounts. On the
occasions where they are invested, those investments are limited to interest bearing cash
management accounts attracting very low rates.
Using a comparison, if a private owner of a commercial office tower was budgeting for capital
expenses required to be spent on their property over time had accumulated funds of $1M, it would
be inconceivable that they would hold this cash in a rainy day bank account rather that utilising
that cash to make a return of some kind. Even the most conservitive owner, who wanted to have
the funds moderately liquid, would not simply keep those reserves in a mattress (i.e. bank
account) waiting to spend a portion of it each year. They would naturally expect some kind of
performance on that capital.
In an environment whereby the value of cash will diminish if not invested in an effective manner, it
appears that Sinking Funds represents a blind spot in the economy.
Potential solutions
The financial sector should consider suitable investment vehicles for this particular asset
class. For example, defensive assets geared for moderate growth with short term liquidity.
Steps required
Closer examination between stakeholders such as the strata industry,
Commonwealth and State Governments and Bankers.Affordability of Housing
in the Strata Industry in ACT
Conclusion
With the strata industry becoming ever-more
prevalent across Australia, including in the ACT, it is
crucial that the sector is supported, with both
legislative and practical backing and assistance.
We want to shift the perception of ownership,
particularly within strata, to a positive, appealing and
profitable prospect for both investors and homebuyers.
It is intended that this white paper will ignite a
programme of change in the industry, with both the
strata community and government encouraged to take
action.
Sources
1 https://apps.treasury.act.gov.au/taxreform
2https://the-riotact.com/act-budget-what-the-act-budget-means-for-your-rates/438457
3https://www.canberratimes.com.au/story/5996054/unit-owners-punished-for-driving-acts-economic-growth-strata-boss/
http://canberraweb.hatenablog.com/entry/2019/06/10/035214
4https://www.legislation.act.gov.au/a/2011-41
https://www.planning.act.gov.au/build-buy-renovate/reviews-and-reforms/managing-buildings-better
https://www.legislation.act.gov.au/a/2020-4/
https://the-riotact.com/changes-to-strata-legislation-come-into-effect/415781
5https://www.canberratimes.com.au/story/5996054/unit-owners-punished-for-driving-acts-economic-growth-strata-boss/
http://canberraweb.hatenablog.com/entry/2019/06/10/035214
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